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On the specification of an investment function

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Summary

In this paper the process of investment planning is followed step by step. It is assumed that the objective of the planning is to maximize the present value of net receipts. Two alternative assumptions (perfect and imperfect competition), concerning the market where the output is sold, are analyzed. One result is the optimal (desired) quantity of capital on hand plus on order, from which investment demand (i.e. the orders to be placed) is derived. This ‘demand’ is compared with available internal funds, where a positive difference between the two is supposed to be bridged only partially by external financing. The extent to which this occurs depends on the amount to be bridged. Then actual investment demand appears to be a convex linear combination of investment ‘demand’ not restricted by funds available and of internal funds. The weights of the components, however, are not constants. An outline is given of the relation of the above approach to the traditional approach of maximizing profits by equalizing the marginal efficiency of investment and the marginal cost of funds. This is done by considering a two-period model in which costs of funds are explicitly introduced.

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Authors
  1. A. L. Hempenius
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Additional information

The author thanks Professor W. H. Somermeyer for criticizing a previous draft of this paper.

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Hempenius, A.L. On the specification of an investment function. De Economist 120, 52–73 (1972). https://doi.org/10.1007/BF01461251

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  • DOI: https://doi.org/10.1007/BF01461251

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